With a market cap of $75 billion, Canada's Enbridge (ENB -1.21%) is one of the largest midstream companies in North America. That has a lot of investors looking to find out more about this company.
If you do go looking into Enbridge's operations, though, be aware that there's an important nuance here that sets the infrastructure company up for a bright future. For those investors looking for a high-yield stock in the energy space, you need to know these three facts about Enbridge before you buy the stock.
1. Enbridge has an impressive dividend story to tell
Enbridge's business is backed by assets that are vital to modern life, including energy pipelines, natural gas utilities, and clean energy projects. All are highly reliable cash-flow generators, with some producing fees (pipelines operate by collecting tolls, just like on a highway), contractually driven revenue, or payments that are regulated by the government, often in exchange for a monopoly. It is the company's reliable cash flow that supports its 7.5% dividend yield.
Image source: Getty Images.
To put that yield into perspective, the average energy stock yields roughly 3.5%, using Vanguard Energy Index ETF as a proxy. The S&P 500 index yields an even lower 1.5%. To be fair, the income you collect from Enbridge will likely make up the vast majority of your total return, but if you are a dividend investor looking to maximize the income your portfolio generates, that will probably be appreciated.
Meanwhile, the dividend has been increased for 28 consecutive years. A 3% dividend increase in November sets the company up to bring that streak up to 29 years. All in, Enbridge is a reliable, high-yield stock. (Note that dividends are paid in Canadian dollars, so the actual dollar amount U.S. investors collect will vary with exchange rates.)
2. Enbridge is changing with the world
For many years Enbridge was heavily focused on its oil pipeline business. It then started to add more exposure to natural gas, via natural gas pipelines and natural gas utility operations.
It has also been inching into the clean energy sector, investing in renewable power to supply its own needs and building things like wind farms in Europe. Its most recent headline-grabbing deal is buying three natural gas utilities from Dominion Energy, a move that will make Enbridge one of the largest natural gas utilities in North America.
The key piece of the story here is that after the utility purchases from Dominion, which will be staggered across 2024, the company's portfolio will continue the long-term shift that has been going on for many years. That may sound obvious, but the numbers matter.
The pre-acquisition portfolio breakdown is roughly 57% of earnings before interest, taxes, depreciation, and amortization (EBITDA) derived from oil pipelines, 28% from natural gas pipelines, 12% from natural gas utilities, and the rest from clean energy. After the deal, oil pipelines will fall to 50%, natural gas pipelines will inch down to 25%, natural gas utilities will grow to 22%, and clean energy will, again, make up the remainder.
Basically, Enbridge is trying to change with the world as cleaner energy sources become more important. Conservative investors will probably be happy to see this trend continue.
3. Enbridge has a strong foundation
Enbridge's balance sheet is investment grade rated. That suggests it is financially strong and can support ongoing dividend growth. But what about the recent acquisition's impact on the company's finances?
Enbridge has a debt-to-EBITDA target range of 4.5 times to 5 times. It expects the deal will push its leverage toward the high side of that range with the goal of lowering it back down toward the low end over time. But at this point there's no expectation that it will go above that range, suggesting that Enbridge will remain a well-capitalized company even after this deal.
In fact, the company recently provided 2024 guidance that suggests leverage will be in the middle of the range by the end of 2024. It appears there's no reason to worry about the company's balance sheet.
The company's target range for its distributable cash flow payout ratio is 60% to 70%. Management currently expects to be in the middle of that range even after the acquisition is completed. Once again, it seems like the dividend is on solid ground and well within management's comfort zone.
Enbridge is a tortoise
Enbridge isn't the perfect stock, given that there's no such thing as a perfect stock. As noted above, the yield will be the main driver of total return. As such, this is really a slow and steady dividend stock. If that's what you want, perhaps providing a foundation for a more diversified income portfolio, then Enbridge will be right up your alley. And while it won't likely excite you very much, it will most likely keep dishing out dividend cash you can use to supplement your Social Security payments.
